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These are the Real Implications Of The Impending Tax Hike In Singapore

Ravinder Kapur

Addressing a recent political meeting, Singapore’s Prime Minister Lee Hsien Loong said that “… raising taxes is not a matter of whether, but when.” That statement has resulted in a great deal of speculation.

Which taxes will be raised? When will the rate hike be implemented? More importantly, what will be the impact on ordinary Singaporeans and on the country’s economy?

Back in 2015, Deputy Prime Minister Tharman Shanmugaratnam had said that the revenue measures taken by the government were sufficient for the planned spending till the end of the decade. At that time, he was the country’s finance minister.

The government was quick to point out that there was no contradiction between the Prime Minister’s speech and the earlier statement of the Tharman Shanmugaratnam.

So, will there be a tax hike or not? The ministry of finance has subsequently issued a statement titled “Did the government change its position on raising taxes during this term of government?” It says that “Any decision to raise taxes will not be taken lightly….”

This seems to indicate that a tax hike is in the offing, but not immediately. If the government says that it needs to raise taxes, the first question that Singaporeans will ask is what is the money is needed for.

 

Why does the government need more money?

It’s useful to remember that Singapore has a balanced budget. This implies that revenues must be equal to or exceed expenditure. In fact, by adopting a prudent spending policy, the government has ensured that the country has a surplus budget.


Source: Singapore government budget 2017

 

The table reproduced above shows that there was a surplus of S$5.18 billion in FY2016 and an estimated surplus of S$1.91 billion in FY17. In fact, Singapore’s constitution requires that the budget remains balanced over each term of government.

If the budget is balanced, why should taxes be raised?

The government needs money for a host of different projects. It has said that annual spending on pre-schools is set to double to S$1.7 billion by 2022. Additionally, the country’s workers need to be reskilled so that they continue to contribute meaningfully to their employers and to the overall economy.

The country’s infrastructure also requires vast amounts. A High Speed Rail is being planned to link Singapore to Kuala Lumpur. The recent SMRT train collision that left 25 people injured highlights the need for investments to upgrade the country’s transport network. This was only the second time that an accident of this magnitude has taken place in the train system’s 30-year history.

Funds are also required to increase the volumes that the country’s seaport and air services can handle. The projects that need financing include Terminal 5 at Changi, which is regarded as among the world’s busiest and best airports.

Health services for the elderly are another area that will require additional resources. Currently, about 440,000 of the nation’s population of 5.6 million is over the age of 65. By 2030, this number is expected to increase to 900,000. Consequently, the government will have to allocate more funds towards adding to the existing healthcare facilities in the country.

 

Which taxes will be raised?

The country has a fairly attractive tax structure. Income tax rates are reasonable with the highest slab being 22%. However, this rate is applicable only for those who earn more than S$320,000 per year. For those who earn less, tax rates are much lower.

A person earning, say, S$120,000 would pay only S$7,950 in income tax. That’s an effective rate of a little less than 7%. That leaves plenty of scope for levying more taxes.

There are no capital gains or inheritance taxes in Singapore. But there is a goods and services tax (GST). This was first introduced in 1994 at a rate of 3%. In 2003, it was increased to 4% and then to 5% in 2004. In July 2007, the GST rate was raised to 7%. It has remained at this level since then.

Analysts say that the GST rate may be raised when the government decides to implement its plan to raise taxes.

Remember that the government has three main sources of tax revenue. In FY2016, GST contributed S$11.1 billion, while corporate income tax provided S$13.6 billion. Another S$10.5 billion was raised through individual income tax. The increase will probably come from one or more of these three when the tax hike is put into effect.

 

Singapore’s competitiveness could fall

In 2017, Singapore ranked #13 in the IMD World Talent ranking. Switzerland, Denmark, and Belgium claimed the first three positions. Hong Kong is at #12. This ranking is prepared by the Swiss-based International Institute of Management Development (IMD) and takes into account the competitiveness of nations.

Here is Singapore’s ranking over the last few years:

Singapore’s ranking in the IMD World Talent Report
2014 18
2015 14
2016 15
2017 13

 

The attractiveness of a country is judged on the basis of several factors. These include:

  • Investment and development of home-grown talent
  • The ability of a country to tap into overseas talent
  • The availability of skills in the talent pool

Tax rates and the cost of living play a large part in making a country attractive for overseas talent. Currently, Singapore ranks #59 among countries in the IMD’s cost of living comparison. It is at #45 in the “effective personal income tax rate” ranking. Any increase in taxes could negatively affect these criteria and make Singapore a less attractive destination for skilled workers from overseas.

 

The timing of the tax increase

The current government is nearly halfway through its term. It is unlikely to raise taxes immediately before the next election. According to UOB economist Francis Tan, the timing of the tax increase could be as soon as in next year’s budget.

However, there is no indication from the government about when the tax hike will be implemented. The current rates may continue for a year or even more. The final decision will only be taken after considering all the relevant economic and political factors.

 

This article “These are the Real Implications Of The Impending Tax Hike In Singapore” first appeared on ZUU Online.

(By Ravinder Kapur)

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